Inflation is rising, and while that puts a strain on monthly budgets, it could mean that Social Security recipients get rewarded with an increase next year. The Social Security Administration (SSA) won't decide on an increase until it compares this year's third-quarter inflation numbers to last year's numbers, but based on inflation data in the first quarter, recipients could end up getting a 2.56% bump in Social Security income in 2018.
Continue Reading Below
How does the SSA decide?
The Social Security Administration determines whether or not to increase Social Security payments based on inflation data from the Bureau of Labor Statistics (BLS).
Image source: Getty Images.
The BLS tracks the direction of prices for goods and services in the U.S., and while it uses various indexes to do this, the Social Security Administration uses the BLS' monthly consumer price index for urban wage earners and clerical workers (CPI-W) in its calculations.
Specifically, the Social Security Administration averages the monthly CPI-W figures reported by the BLS during the third quarter, and then it compares that average to the monthly average from the last third quarter that resulted in a cost of living adjustment (COLA) increase.
Continue Reading Below
For example, CPI-W didn't increase between the third quarter of 2014 and the third quarter of 2015, so there wasn't a COLA increase in 2016. Since there wasn't a COLA increase in 2016, but there was an increase in 2015, the Social Security Administration compared the third quarter of 2016 CPI-W figures to the third-quarter 2014 figures to determine whether or not a COLA increase was necessary in 2017.
Because the CPI-W was 0.3% higher in Q3 2016 than it was in Q3 2014, Social Security benefits were increased by that amount in 2017.
What's on tap for COLA in 2018?
Since 1975, Social Security benefits have increased in all but three years, and the average COLA increase has been 3.8%. Since 2005, the average COLA increase has been 2.03%.
This year, the CPI-W has been rising steadily, and as you can see in the following table, it's higher than it was in the first quarter of 2016. If we average the monthly CPI-Ws for the two periods and then compare them to one another, we discover that CPI-W was up 2.56% year over year in the first quarter.
Data source: Bureau of Labor Statistics.
If this year-over-year change in CPI-W remains the same through the third quarter, then Social Security recipients can expect to see their Social Security income increase by 2.56% in 2018.
However, don't start counting on that extra money just yet. Alot can change over the span of a couple quarters, and because CPI-W increased through the third quarter of 2016, year-over-year comparisons will get tougher as we get deeper into 2017. Also, recent interest rate increases by the Federal Reserve could slow inflation, and if they do, that could reduce the amount of a COLA increase, too.
It's also important to remember that inflation could increase how much recipients pay for Medicare Part B and Part D health insurance. Because many Social Security recipients pay their Medicare bill directly from their Social Security income, a lot -- if not all -- of any COLA increase might not show up in their monthly Social Security checks.
The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.